US gold futures finished 50 cents lower in choppy trading on Wednesday, but off the session low because of a stronger dollar, and dealers said the precious metal could fall further because of chart-based weakness and a lack of buying interest.
A floor trader said an option trading has been bearish of late, a sign that underlying futures could test lower prices in the short run. Most-active August gold on the Comex division of the New York Mercantile Exchange settled down 50 cents at $674.60 an ounce.
The contract peaked at $677.30, which was near its three-week high of $680.60, and bottomed at $670.20. Jonathan Josses, an independent trader, said from the Comex floor that trading was "directionally" and turnover was low as investors lacked buying interest. "Options trading over the last two weeks was very bearish. Hedge funds and mutual funds had been buying a lot of puts," said Josses, pointing out that the price of put options was getting higher and the calls were getting cheaper.
"All those are telling you that we should be going lower," he said. Greg Weldon, chief executive of weldononline.com, said in a note that gold was trapped in a tightening range amid intensified under-performance.
He cautioned that a possible rally in the US dollar, particularly one that came in conjunction with a rising Japanese yen, could undermine bullion. Weldon said he remained mostly neutral on the entire metals complex.
However, he said that longer-term investment prospects remained more positive, but the risk had expanded. The euro dropped against the yen after the European Central Bank gave no clear indications about the outlook for interest rates beyond 2007, while global equity market weakness broadly lifted the Japanese currency.
The yen was on track for the largest daily increase against the euro and US dollar in about two months, with investors exiting risky trades funded by borrowing cheap in yen after seeing stock markets around the world weaken.
The ECB lifted euro-zone rates, as expected, to 4 percent on Wednesday, and markets expect at least one more hike this year. Comex estimated final gold volume at 91,567 lots and options turnover at 11,384 lots. Turnover in the Chicago Board of Trade's electronically traded 2003 gold contract was 27,782 lots as of 2:41 pm.
Market watchers said recent heavier-than-usual central bank gold sales had weighed on bullion prices. On Tuesday, the Bank of Spain said it sold nearly 1 million ounces of bullion from its reserves in May, continuing a trend that began in March and has amounted to sales of more than 100 tonnes in total.
Economy Minister Pedro Soles said on Wednesday that the proceeds had been reinvested in bonds. According to the European Central Bank Gold Agreement, ECB banks have a limit of selling 500 tonnes of gold annually. However, a recent informal poll by Reuters showed that the ECB banks are likely to sell less than the agreed limit. Spot gold traded at $669.20/0.70 an ounce, virtually unchanged from $669.20/0.70 an ounce late on Tuesday.
The London afternoon gold fix was $669.70. Comex July silver finished down 9.50 cents at $13.717 an ounce, after trading between $13.645 and $13.860. Spot silver fell to $13.68/13.72 from $13.75/13.78 late on Tuesday.
The London silver fix was $13.69. Nymex July platinum closed $1.30 lower at $1,300.10 an ounce. Spot platinum was quoted at $1,290/1,295 September palladium ended up $3.30 at $374.90 an ounce. Spot palladium fetched $366/369.